IGO Ltd
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Thank you for standing by and welcome to the IGO Limited FY '22 Half Year and December 2021 quarter webcast. [Operator Instructions].I would now like to hand the conference over to Mr. Peter Bradford, Managing Director and Chief Executive Officer. Please go ahead.
Thank you, operator. Good morning, everyone, and welcome. This morning we released a package of documents to the ASX, including our December 2021 quarterly report, our audit reviewed half yearly financial results and our annual mineral resource and ore reserve update. With me on this call today are Matt Dusci, our Chief Operating Officer; and Scott Steinkrug, our Chief Financial Officer. Together, we look forward to stepping you through the key elements of these releases during this call. Slides 2 and 3 highlight our cautionary statement and disclaimer and our competent persons statement. Of note, all currency announced in the presentation today are in Australian dollars unless otherwise noted.Moving to Slide 4. Our people are our first priority and we have made continuous progress to ensure their safety and well-being. It is therefore pleasing to see positive trends in our lead and lag safety indicators and the effectiveness that our engagement with our people has had on enhancing safety behaviors. With the COVID pandemic now entering a new phase here in Western Australia, we have implemented a range of measures across our business, which are designed to slow the spread of infection and manage any impact that COVID may have. While this new phase will present new challenges, IGO is well placed to manage the risks to both our people's health and our business continuity.Turning to Slide 5. Sustainability is a strategic pillar for IGO and a key part of this is our response to climate change. Over the past 6 months, we have made positive progress with the delivery of our 2022 financial year decarbonization plan, which is part of our longer-term aspiration to be carbon neutral by 2035. Of note, we recently contracted with Zenith Energy to install 10 megawatt hours of battery storage capacity and to expand the renewable energy generation at Nova. When operational, this initiative will enable Nova to be powered 100% by solar energy for up to 9 consecutive hours per day during the spring and summer. This will allow the diesel generators to be switched completely off during these periods resulting in a further 24% annual reduction of the carbon equivalent emissions at Nova. This is a fantastic outcome, which we believe is an industry first for the mining sector.Moving to Slide 6. I'm pleased to report that through our continued commitment to operational excellence, we have followed the strong September quarter result with another strong set of results for the December quarter. At Nova, strong production and higher commodity prices delivered continued strong financial performance for both the quarter and the half year. We also made solid progress within the Tianqi Lithium joint venture with Greenbushes delivering production in line with the prior quarter while at the Kwinana refinery, Train 1 progressed from batch to continuous operations. In parallel, the expansion opportunities at both Greenbushes and Kwinana have progressed in line with or better than expectation. In December we announced the acquisition of Western Areas, which is to be completed by a Board recommended scheme of arrangement. Our strong operational performance combined with higher commodity prices and capital discipline have resulted in robust financial results and a strengthened balance sheet providing a strong platform to continue to pursue our clean energy growth strategy and to deliver cash returns to shareholders.Moving to Slide 7 where we summarize our key financial results for the quarter and the first half. Sales revenues of $188 million for the quarter was in line with the prior quarter with lower metals sales volumes offset by higher prices. Underlying EBITDA and net profit after tax were higher quarter-on-quarter driven by a strong contribution from Nova, improved profitability from the lithium joint venture and an uplift in the mark-to-market value of our listed investments relative to the prior quarter. Underlying free cash flow of $72 million was lower quarter-on-quarter driven primarily by timing of Nova sales and partially offset by no further cash calls for the lithium joint venture. Results for the first half were generally lower than the prior year -- prior comparative period because of timing of -- primarily driven by the timing of -- sorry, the results of the divestment of Tropicana offset by stronger performance from Nova.Moving to Slide 8 where we provide a cash flow reconciliation for the quarter. Once again Nova contributed strong free cash flow of $102 million. Key outflows included $45 million for the Silver Knight transaction and $20 million of exploration and evaluation expense. Group underlying free cash flow margin for the first half of the 2022 financial year was 48%. Additional cash outflows for the first half included the payment of the $76 million final dividend for FY '21. At December 31, our net cash position was $570 million.Moving to Slide 9 and a reconciliation of net profit after tax. Key items to note include the improved earnings contribution from Nova, a $7.6 million uplift in the value of our investment portfolio and a $3 million quarter-on-quarter increase in IGO's share of profit from TLEA, the lithium joint venture.Moving to Slide 10 where I am pleased to advise that the Board has declared an interim fully franked dividend of $0.05 per share, which represents a payout of approximately 21% of underlying free cash flow for the first half. This is consistent with IGO's stated policy to return 15% to 25% of free cash flow to shareholders. Moving to Slide 11 for a discussion on Nova, which has continued its track record of consistent performance.Moving to Slide 12. Nickel and copper production were in line with the prior quarter while copper production was marginally lower due to lower metallurgical recoveries. Year-to-date Nova is tracking ahead of pro rata production guidance for all metals. Nova continued to benefit from higher metal prices, which underpinned strong revenue and free cash flow performance while also delivering higher byproduct credits to reduce our unit cash cost performance. Cash costs for the quarter were $1.73 per payable pound of nickel bringing cash costs for the first half to $1.86 per pound, which is well below the bottom end of our 2022 financial year guidance range of $2 to $2.40 per payable pound of nickel.Turning to Slide 13 where we showcase the last 4 quarters of consistent production and cash cost performance from Nova. Looking ahead to the March quarter, we expect production to be lower due to planned lower feed grades. Our 2022 financial year guidance, however, remains unchanged. Subject to metal price performance in the second half, we expect cash costs for the full year to come in better than our guidance range. Turning to Slide 14 where we will discuss the progress with TLEA, the lithium joint venture with Tianqi.Moving to Slide 15. TLEA enjoyed a solid quarter of operations while also making good progress on the various expansion projects at both Greenbushes and Kwinana. IGO's share of net profit after tax for the quarter was $9 million for the first half audit-reviewed profit contribution to IGO from TLEA of $14 million. Included in these numbers are 2 noncash adjustments to IGO's attributable profit after tax from TLEA that were applied retrospectively to the September quarter. These resulted in the September quarter TLEA share of earnings decreasing from $13 million to $6 million. IGO made no capital contributions to TLEA in the quarter. Spot lithium prices have continued to move rapidly higher, which has improved -- which has informed higher benchmark prices used to set contract pricing for chemical grade spodumene sales. Based on these movements, IGO expects chemical grade spodumene pricing in the second half to be approximately USD1,770 per tonne FOB, up significantly from the approximate USD590 per tonne FOB in the first half.Moving to Slide 16. At Greenbushes, spodumene concentrate production was broadly in line with the prior quarter at 258,000 tonnes on a 100% basis. Unit cost of goods sold increased quarter-on-quarter from $310 per tonne of spodumene to $388 per tonne. This was primarily due to lower sales as a result of a delayed shipment at quarter end as well as higher royalties resulting from higher benchmark spodumene prices. I note that royalty costs in the quarter increased to $146 per tonne compared to $90 per tonne in the September quarter.Moving to Slide 17 for a more detailed discussion on operating and expansion activities at Greenbushes. The technical grade plant performed better than expectations during the quarter while recovery performance at chemical grade plant 1 and 2 were both lower than expectation. Rectification and optimization plans are in place to address these. Construction of the tailings retreatment plant is nearing completion and we expect to commence commissioning in the March 2022 quarter. In parallel like spodumene, advanced the detailed engineering design and refined construction timelines for chemical grade Plant 3.Moving to Slide 18. At the Kwinana refinery, the focus has been on transitioning from batch to continuous operations and the production of the first battery grade lithium hydroxide, which is expected in March. Despite some minor delays caused by process and equipment modifications, we remain on track to meet that target. We also commenced engineering studies and planning for the recommencement of Train 2 construction during the quarter. This will be a phased approach and already $18 million of early works for the pyrometallurgical and leasing circuit has been permitted. A final investment decision on the full recommencement of construction is expected in the second half of the calendar year.Moving to Slide 19 where we set out our guidance for the lithium joint venture for the full 2022 financial year. We are guiding to continued strong performance from Greenbushes, which together with significantly higher spodumene prices, is expected to deliver significant cash at Greenbushes to fund the ongoing expansion activity while also delivering a dividend to TLEA. This will fund ongoing trial production activities at Kwinana as well as the engineering studies and early works for the Train 2 construction recommencement. Moving to Slide 20 where I will briefly talk to the highlights from the annual mineral resource and ore reserve update released today.Moving to Slide 21. Relative to our last mineral resource and ore reserve update, there has been significant change. This is a result of our continued transformation of our business as we develop our strategy to focus -- sorry, deliver on our strategy to focus on those metals critical to enabling clean energy, including renewable energy generation, grid scale energy storage and electric vehicles. We have divested Tropicana, acquired Silver Knight and invested into an indirect interest in the Greenbushes mine. The upside potential we saw at the time of our investment into Greenbushes has been delivered with a 52% and 20% increase in mineral resources and ore reserves, respectively. This increase is attributed to the inclusion of the Kapanga deposit and depth extensions in the central deposit.Moving to Slide 22 where we set out our annual mineral resource estimate along with the comparative numbers from the prior year. I do not plan to dwell on this slide. Moving to Slide 23. We do the same for our ore reserve estimate and once again I do not plan to dwell on this slide. Moving to Slide 24 and a brief summary of our exploration activity for the quarter.Moving to Slide 25. IGO remains committed to exploration as a key plank to our growth strategy. To that end, we have secured a portfolio of built-to-scale land holdings in some of the best terrains across Western and Northern Australia. Together with our best-in-class team, access to the best science and a $65 million budget commitment, we have all the ingredients to drive transformative value creation through discovery.Moving to Slide 26. In the Near Nova environment, we continue to delineate mafic-ultramafic intrusions, which are indicative of productive nickel and copper sulfide systems. In the quarter, we completed a further diamond drill hole at Chimera, one of our highest ranking targets. This drilling upgraded the Chimera target and identified a strong off-hole conductor, which will require further drilling. We also completed metallurgical drilling at Silver Knight, which will inform an updated resource and reserve.Moving to Slide 27. Elsewhere on the Fraser Range, we continue to progress a number of targets. As with the drilling closer to Nova, we are encountering mafic-ultramafic rocks in most drill holes with some showing evidence of magnetic nickel copper sulfide. We continue to see the right rocks and the evidence of mineralization process and remain confident of delivering discovery. Moving to Slide 28 where I will spend a few moments discussing the announced transaction with Western Areas.Moving to Slide 29. As announced in December, IGO and Western Areas have agreed to a scheme of arrangement whereby IGO will acquire Western Areas or $3.36 per share to be paid in cash. This transaction represents a logical consolidation of nickel assets in Western Australia delivering a strong combined nickel portfolio of production, development and exploration stage assets in a Tier 1 jurisdiction. The offer price represents a premium to the understood trading price of Western Areas prior to our interest in the transaction becoming public and delivers Western Areas' shareholders with the certainty of a cash transaction. IGO is funding the transaction via new debt facilities and existing cash reserves.Moving to Slide 30 where I will briefly talk to our rationale for the transaction. First, the transaction is on strategy and aligns to our focus on clean energy metals. Second, the 100% cash consideration results in no dilution and enhanced returns for IGO shareholders. The transaction will be accretive with IGO expecting the transaction to be free cash flow accretive from the 2024 financial year. The Western Areas assets enhance and rebalance our portfolio, adding longer-dated nickel units to our reserve base and extending our nickel production profile. The transaction represents a logical consolidation in the Western Australian nickel space with synergies to be gained through greater scale and optimization. Finally, the collective nickel expertise of IGO and Western Areas coupled with IGO's strong balance sheet will enable us to maximize the value of the expanded portfolio. Moving to Slide 31 and a short summary of today's presentation before we move to Q&A.Moving to Slide 32. All of us at IGO are proud of our achievements over the December quarter and the first half of the 2022 financial year. We have continued to safely deliver operational and financial performance while also maintaining our focus on growth, our people and sustainability. We have remained focused on the safety and well-being of our people and we are well prepared as we enter the next phase of COVID in Western Australia. Nova has performed well with nickel production and cash costs ahead of pro rata guidance at the half year. Greenbushes production rates are increasing and trial production at the Kwinana refinery is expected to deliver battery grade product in March. Today, we have announced a significant upgrade in the mineral resource and ore reserve at Greenbushes, which underpins the expansion projects being progressed at both Greenbushes and Kwinana. The announced transaction with Western Areas is a strategic and logical transaction to enhance IGO's nickel portfolio. Finally, our consistent operational performance combined with higher metal prices has delivered strong financial performance enabling the Board to declare a fully franked interim dividend of $0.05 per share.Thank you for joining us on the call this morning. We will now hand back to the operator for questions. Thank you, operator.
[Operator Instructions] Your first phone question today comes from Levi Spry with UBS.
I've got 2 questions, please. Firstly, just on the Kwinana downstream. So how do we think about when you declare commercial production? Is it based on when the product gets qualified? And what's the ramp-up from battery grade in March look like?
Yes. I'll get Scott to talk to that commercial production now.
From a commercial production outlook, we have to look at this from an accounting sense and account standard perspective and what the criteria is when the processing plant is actually capable of producing as intended. So that's going to be -- that's something that's going to be quite a qualitative assessment. And I'm going to pass over to Peter, is there anything further you want to add to that?
I think we said in the materials that we don't expect that before the June 30. So most likely I would think in the September quarter.
Okay. So full year FY '22. And so how do we think about what looks like a bit of conservatism on the timelines for Train II? Given what's happening in lithium markets, given the huge amount of lithium units coming out of Greenbushes, how much conservatism is in your time lines for Train II?
I wouldn't say there's any conservatism in there, Levi. It's a process to get it all up and swinging and dancing as planned and we're having to work through a number of sort of process and equipment changes along the way and we've dealt with a number of those to transition from batch to continuous operations. We have operated continuously and now it's a matter of doing that enough to progressively improve the quality metrics to the point where we're producing a battery grade salable product, then getting that qualified by our customers and continuing to ramp up the process. And the team on site is working around the clock to make that happen. One thing that is a cause for concern when you talk to conservatism is we've all seen the COVID incidents at [ Kemison ] and nearby Kwinana alumina refinery and so obviously we've got COVID in the community around that Kwinana lithium hydroxide refinery and worst case would be for some sort of outcome there that stops people from being able to turn up to work and deliver that ramp-up.
But just rounding off on that. So what do you need to see at Train I to press a button on Train II? Is it a certain run rate at battery grade?
No. We're moving that along in parallel and you would have seen that in the materials that we have already made an early works commitment to the pyromet and leaching circuit and we'll start final design and construction work around that. So that will be progressed ahead of a formal FID later in the year somewhere in the second half of the calendar year. So it's a phased approach and we're trying to deal with the long lead time early works -- through the early works.
Okay. And just last one. So on Western Areas, stock is trading above the bid, Wally's bought some on market looks like? Have you had conversations with them? What are the -- just remind us of the time lines and the mechanics if there is a higher bid that comes?
So our understanding is the only bid is from IGO. It's our understanding that no other parties have done due diligence and so therefore we're working together with Western Areas going full steam towards the progressing the scheme booklet. The independent expert is preparing the [ FEMA ] report and in parallel the booklet is being prepared and we expect that in due time according to the timetable we put in the announcement release in December. That booklet will be mailed to shareholders that will allow a scheme vote towards the end of April and completion probably in early May.
Your next question comes from Daniel Morgan with Barrenjoey.
Just on Kwinana. Can you outline what are the key issues to date on achieving battery grade specifications for the product?
I'll get Matt to expand on this in a little bit. But the key element there for delivering battery grade is getting the right quality metrics and that's a bit of an iterative process that takes time and some of that time is simply required to flush some of those contaminants out of the system. Matt, do you have anything to expand on that?
The key element there is continuous runs. So in the previous work, we've done a lot of -- we had it run continuously, but we've also had to take elements offline to do rectification work. To get battery grade, you really need to run that process continuous to ensure that you get the sort of levels within each of the tanks and all the purification processes working and that will ultimately give us battery grade. Processes today, we have produced lithium hydroxide. We're close to that spec so feel comfortable we'll be able to reach that battery grade with this from now through sort of March.
And just with Greenbushes and the guidance provided, specifically referring to CapEx where you've got $250 million or $300 million outlined for FY '22. Can I get a little bit more about this? Is this expediting projects or is it capital inflation i.e. in your December '20 acquisition presentation, which I know was quite a while ago now, you said there was USD30 million to USD50 million left at the tailings retreatment plant? Has that project budget increased or are you bringing forward some capital items from say CGP 3 or 4?
The big projects there are CGP 3 and 4 in sequence and we would expect construction activity on CGP 3 to start later in the calendar year. But the big projects underway right now are mine services area -- a new mine services area to accommodate the expansion of the mining fleet and that's currently underway. We're also doing works to build a new tailings dam and the clearing and groveling for that is underway and tailings dam construction will commence during the second half. And then we're also doing a bunch of other work to prepare the infrastructure to accommodate the significant expansions to the site and that includes things like our normal magnets workshops, our water storage dams, et cetera. And that what -- that delivers the overall sum total of the CapEx that we're guiding to there.
I know that you've given us your expectations for pricing for the chemical grade products in the second half based on the benchmark prices in the market. Just wondering if you could talk at all about how the technical grade spodumene prices work and just remind us of the expectations there.
Yes, those are negotiated and they are actually confidential and IGO is not able to talk to those.
Your next question comes from Mitch Ryan with Jefferies.
I just wanted to follow up on a question from Dan, you didn't quite answer it. You obviously outlined the CapEx that's going to be spent at Greenbushes, but I just wanted to know if that was additional to the base -- the originally guided CapEx or if it was a bring forward of CapEx from future periods.
Overall relative to the lens we were looking through in December 2020, everything at Greenbushes has been accelerated and that's because back in December 2020, spodumene prices were sitting around $400 per tonne and now they're up about well above $2,000 per tonne spot. And therefore, there's a desire from all stakeholders at Greenbushes to accelerate the expansion plans and increase production and that results in some bringing forward of capital expenditures.
Makes complete sense in the environment we're working through. I was just trying to understand if it was the base growth in the costs or if it was a bring forward. And secondly, while we talk about cost inflation, you've also talked to -- if you look at the Greenbushes numbers and the costs quarter-on-quarter, obviously a large component of that was an increase in the royalties, but there was also 6% or 7% increase in underlying costs. So I was just wondering if you could give any color as to what was driving that, if it was labor, if it was consumables or if it was just general a bit of everything?
Labor generally in Western Australia is probably the cost factor that's moving the most and we do see some movement across our construction activities and again there's a huge labor component in that as well as the inflationary pressures we're seeing on steel and equipment and freight. And so there is a little bit of a rising tide. Overall cost control when we look at our cash costs on the money out of the door, the discipline there at Greenbushes has actually been very, very good. And over the course of the year, there's probably been a movement of circa $5 per tonne of spodumene through the 12 months.
Your next question comes from Kaan Peker with Royal Bank of Canada.
Just wanted to ask a few questions on the lithium JV. With the Kwinana hydroxide plant, and correct me if I'm wrong, but most can produce intermediary salable product. Is that possible at Kwinana?
We've talked before about there's a thing between product chemical grade that we would expect to be producing some of before we get to a battery grade. We're still not quite there on the battery grade spec even though we thought we might get there back in November-ish. So once we do get that, we'll be selling some of that product and likely that will go on to -- into an auction process similar to the BMX platform.
And guidances on the battery grade?
Less on the battery. I think that the key objective here for us is making this plant to do what it was designed to do and produce battery grade, get that signed off by our off-takers and start delivering into our off-take contracts.
And just circling back on Dan's question. I think, Peter, you mentioned -- quickly if I'm right again, $1,770 in second half of spodumene pricing. Is this only for chemical grade? I just wanted to clarify.
Correct, chemical grade. There's a different pricing mechanism for chemical grade. It's negotiated with the off-takers and it is confidential and IGO's been instructed not to talk to it.
No problems. And on Greenbushes, I think production's decreased quarter-on-quarter. It's CGP1 recovery and I think you also called out CGP 2. Could you just expand on this and why you think it's temporary?
Yes, CGP1. Well, there's 2 different reasons for the 2 plants. With CGP1, it was a case of -- a critical case of plant being taken offline for a period and with the team choosing to continue running and that resulted in lower recoveries for that period of time while it was offline. That's now back online and we expect normal performance in the March quarter. With chemical grade 2, we're just continuing to work through that process of optimizing chemical grade plant 2, which only started commissioning back in May and getting the same level of performance out of it, which we customarily get from chemical grade plant #1. So it's a process and I expect that process will take another 6 months to optimize recovery outcomes from CGP2.
And I think finally, just on Nova. Outside of mining depletion, there was a minor decrease in Nova reserves. Can you just talk through some of the assumption changes I think related to plant design and plan expectations? Can you expand on those?
Matt, do you want to handle that?
Yes, sure. We talk about 6,000 tonnes adjustment to modifying factors. The large and significant portion of that is mostly associated with truing up mine actuals versus mill actuals. So we're seeing that during the course of the year, we're slightly overestimating the mine actuals versus mill actuals and this is just a true-up so the mine actual equals mill actuals for the life of mine.
Your next question comes from Matt Greene with Credit Suisse.
Just on starting with Kwinana if I may. Assuming you do achieve battery grade on a continued basis by March and then progress to your qualification process, I was just hoping if you could just give a bit more granularity as to what you'll be focusing on during that qualification assuming Train I is performing to expectations? Is this just more the logistical challenges to avoid any product contamination or are there any other focus areas we should be aware of here?
We're through that qualification process and we just continue to ramp up. And while we're pending qualification and not delivering into contracted off-take agreement, we'll just sell that battery-grade product into the spot market using an auction platform.
Okay. And I presume is -- that 6-month time line, is that quite conservative? Is it your off-take partners that will determine when this process is completed?
It varies between off-take partners so that would be the longer end of the various ranges.
Okay. And then just on Greenbushes, I guess a follow-on from Kaan's question there. I see you haven't broken out the second chemical grade plant, but just how have the volumes been ramping up quarter-on-quarter there? Are you able to provide some color there?
Volumes for the chemical grade plant, we're achieving those and the only optimization issue we really have is around getting this recovery optimized and that's just a matter of time to be able to deliver that and deliver the same outcomes we get from CGP1. And largely it's around balancing the load between the 2 different recovery streams, which is the heavy metal separation and the flotation and just getting that right and also getting the fine right. So we're not losing material through producing an excess amount of fines.
Okay. And then just on Nova, the recovery is sort of in line quarter-on-quarter, but I guess in the September quarter, you had some of that challenging C5 material. Has that sort of carried over into the December quarter or is it just more a case of the ramp -- the mill ramping up and down during your shutdown there?
No, basically around -- we struggled with understanding the recovery outcome for Nova for the second quarter and we're continuing to do a lot of work on it. There is a level of thinking at the moment that it could be a result of the higher amount of broken stocks that we are carrying underground and on surface on the run-of-mine stockpile. So we're doing a little bit of work to understand how much that aging of broken stocks underground and on surface is impacting recovery. And the obvious reason why we are maintaining a high amount of broken stocks underground and on surface is just as a preventative measure in the event that as a result of COVID, we don't end up with enough bodies on site to do the mining and we have that inventory sitting in the ground or on surface to be able to keep the plant running. So one preventative measure may in fact be creating a little bit of a recovery problem for us. But we're still working through that to understand it.
That's helpful. And just one last one, if I may. Just on the capital gains tax. I think it's $170 million you're expecting this half. Just presume this is now moving into the second half and just to confirm that number hasn't changed at all.
No. That number hasn't changed so that's the payment that we're going to be making in February and by the way these aren't capital gains taxes, these are just regular corporate tax payments on renew account. And in the materials, we say that that amount will be paid in February.
Your next question comes from Jack Gabb with Bank of America.
A quick follow-up on Kwinana. I guess can you give us any sense of where indicative pricing would potentially be for your longer-term off-take? I guess obviously your spodumene is priced 6 monthly and a bit of a no discount, but certainly lags relative to benchmark. So curious where sort of hydroxide pricing structures are going to land? And then secondly, as part of Kwinana obviously, you've guided to a loss -- EBITDA loss this year. Just curious once you hit commercial production, should we expect you to be earnings positive in that first 6-month period?
Yes. I'll get Scott to talk to the latter question first.
Certainly after we've done the commercial production, we would expect EBITDA to then revert to being positive. We're currently seeing negative EBITDA for Kwinana because of the ongoing costs that belong to Kwinana that we -- that TLEA have elected to expense. There are some who might say that these could be capitalized as part of the commissioning process, but it's legacy as part of Kwinana and we continue to extend and we'll grandfather that as well into our policy. But certainly after commercial production, we would expect EBITDA to be positive.
Yes. And then on the pricing for the lithium hydroxide, again these contracts have price resetting mechanisms based on benchmark prices for lithium hydroxide and which will inform increasing prices as we see higher lithium hydroxide prices going forward. And all of the mechanisms across the 4 off-take contracts are different.
And then just returning to the costs on Greenbushes, Obviously you called out the royalty increase, which I guess is a little bit surprising it's based off benchmark pricing rather than sort of realized pricing there. So does this mean that we're going to see a further step-up in those royalty costs this quarter given benchmark prices have shifted higher again?
That would be correct. But offsetting that, the sales pricing mechanism benchmark is now called out as well so at least we'll have more revenue to be able to pay that higher royalty. And at the moment, there is -- to belabor the matter, we've got a different benchmark mechanism for the payment of the royalty which has been negotiated with the WA state government, which sees a faster adoption of higher spodumene prices in a rising market and therefore, higher royalties lead to higher sales revenues. So it's a strange dynamic.
Yes, a little bit strange, but I understand. And then last one, just following up on Western Areas. It's interesting you said you didn't believe any other parties had done any due diligence. Just can you remind us did you have an exclusive due diligence period or has it always been open to others?
There's always been opportunity for other people to approach the Western Areas Board even when we were doing our due diligence prior to announcement. To the best of our knowledge, no one has and to the best of our knowledge, no one has done due diligence during that period where we have been actively working with Western Areas. And to my knowledge, ours is the only bid on the table.
Your next question comes from Lyndon Fagan with JPMorgan.
Just back to the CapEx at Greenbushes, $250 million to $300 million this period, quite a bit more than we expected. Can you maybe articulate what was in the first half and also whether any of these projects that you sold out flow into the next fiscal year just to give us a sense of what to put in?
Lyndon, so I'll just start with that question. So $250 million to $300 million, bear in mind that's for the full financial year and for the first half of the year we spent $74 million. You can see that in the back of the table in the quarterly report. So that would lead then -- you can do the math there, $150-ish million or thereabouts plus or minus for the balance. And Peter has spoken to those that is mine services area that means TSF, we know that Greenbushes have got numerous other capital requirements from a sustaining capital perspective, there's elements on CGP3 as well. At CGP3 which probably construction will get underway subject to final Board approvals probably around the middle of this year is -- I think the quoted capital cost for that about AUD516 million and a large part of that will then be incurred in FY '23 and FY '24. And then immediately following that, we would expect -- subject to Board approvals and market conditions, we would expect a similar level of CapEx for CGP4. So there's going to be continuous CapEx at Greenbushes as we continue the process of expanding the mine. And remembering at the end of this, mine production will be double what it is today.
And just continuing the conversation on CGP3. If construction does commence this calendar year, can you maybe just update us on when first production would be and how quickly that could ramp up?
That would be FY '25 -- 2025. I think in the last quarterly we guided that that would be early 2025.
And how long to get it to full production once you hit first production?
I think as we've evidenced on CGP2 from a tonnes point of view, they ramp up fairly quickly. CGP2 has taken us longer to get the recovery where we want it. Presumably, we'll have a lot of learning experiences on CGP2 and how we optimize the recovery for it, which will help deliver a better outcome on CGP3. I would expect 2 quarters to be ramped up from a throughput point of view and maybe sort of a design recovery within the first year.
And just look, a final question on the Greenbushes cost guidance. Are you able to strip out the royalty component of that cost guidance just to give us a sense of what is the underlying operation?
Lyndon, we've spoken to that and out of the 380 acres, about $140 a tonne that related to the royalties in the previous figure of 310 that we guided towards for the first quarter, figure was $90 a tonne.
Yes. I'm just sort of looking at the financial year there's a raise. What's the underlying royalty assumption within that range?
The underlying royalty assumption would be then -- and look, we haven't since provided guidance for ongoing spodumene pricing, but it would be for the second half of the year similar to the $1,770 that's Peter spoken to. That would have been the basis then for the assumption for that figure for that range.
We can connect with you later, Lyndon, and just step you through the math on that if you like. All of the information is in the pack to go with that.
Your next question comes from Tim Hoff with Canaccord.
I was just wondering if you have a look at that 6-month lag, that's obviously -- we've had a big jump up in pricing so that hit a little bit this quarter. When you look historically, was that the case when you were doing your DD that in 2016, '17 there was a lag, but does that lag also apply from 2018 when prices were falling?
Correct. You were penalized on the uptick in the market and you benefit on the downtick in the market. I think at a steady state, I don't know if it makes any difference at all.
Yes. If we can get that stable pricing in lithium. I think the...
All the prices are far better than what we imagined when we're sitting there doing due diligence in late 2020 when spodumene was at the bottom of the market and as you will recall, we used $590 per tonne for our long-term pricing. And so it's been a great turnaround in the market. And as [ Ken Griffin ] once said, it's turned around so fast that it actually gives you whiplash watching it. And we're really excited about where we are today and where the market is going.
Absolutely. I think everything else I was looking at got answered. So that's it.
Your next question comes from Matthew Frydman with Goldman Sachs.
My questions are mostly on Greenbushes. So I guess firstly, you reiterated that you won't have to make capital contributions into TLEA thanks obviously to the spodumene price. But as you've spoken about on the call, it looks like CapEx is also maybe a bit higher and a bit accelerated as we discussed. So the question is how should we think about cash contributions coming back from TLEA in that context and in the context of the guidance you've given for the second half around cash costs and spodumene prices. Is it possible that we see a distribution back from TLEA to IGO in the second half of FY '22? And if not, then what's going to drive that? What's the distribution policy going forward?
We would expect that if its pricing is maintained, then we would see a return to IGO in the second half.
Okay. But you don't need the pricing to be maintained because you already know what the price is. So it's fair to say that you would expect to see a distribution in the second half?
Sorry, I got distracted there. If this pricing is maintained in the second half of the calendar year, we would expect to return in the second half of the calendar year.
Got it. Okay. And so secondly, thank you for providing the FY '22 guidance. Is it your expectation that we'll pretty much always have to wait until the third quarter of the financial year to see that financial year guidance given that the budgeting and I guess guidance time frame of your JV partners or are you hopeful that you'd get a more timely guidance outcome going forward?
We certainly like to get to that position where we are guiding on the whole business at the same time when we do our June quarter results each year and being able to provide that guidance for both the nickel business and the lithium business and ultimately to be in a position that we can provide some longer-term outlook as to what that lithium business is doing and better inform people about what production costs and CapEx looks like over time.
Okay. Got it. A couple of quick ones. On my calculations, the sales in the December quarter were 256 kilotonnes. Have I got that correct? Have I made a mistake there and if I have, can you maybe talk us through how to get to your sold tonnes number?
Scott gave me a thumbs up so I think you got it fairly right.
Yes, you've got it pretty good there.
So, we'll spend around this.
Okay. That's helpful. And then I guess just finally on Kapanga, you've called that out in the MR/OR update. Can you talk us through at a high level what's required to develop that deposit in terms of approvals, any infrastructure that needs moving, any community considerations there? And should we think about that at the back end of the mine life or could that come in at an earlier stage?
This is Matt here. All approvals are in place and how you consider Kapanga is essentially the footwall load and the central load, it's about 200 million. So it just performs part of the main pit within Greenbushes pushing back waste -- additional waste strip to get that material down as part of our continuous mining process.
Your next question comes from Jon Bishop with Euro Harley.
Just a very quick one. I know there's been a lot of questions on the pricing that you've referenced there for the chemical grade spodumene. Is there anything else that needs to go into that number that you've quoted there, I think it's $1,770 and when does that affect, is it January 1?
Correct. That's for the 6 months to June 30.
Okay. But is there anything that else needs to be considered around that number or is that sort of the average or the agreed price effectively for the 6 months?
Well, there's a pricing mechanism that's just straight off benchmarks and then there's a little bit of a bulk discount to the supply to that benchmark price and then that sets the price for the 6 months period.
And Jon, it is FOB as well so there's no shipping or insurance costs we would -- that the mine would add to that.
Understood. And just on Silver Knight. I might have missed this in the releases this morning. But what's the expected timing of getting rigs on the ground there and the sort of ramp-up of activity? What should we be looking for there?
Jon, it's Matt here. So we started access drilling in December so that's already commenced. We'll start to reach commission drilling out there this quarter with the idea of advancing that both into a resource and into reserves and ultimately to the Nova life of mine plan.
Okay. And what's the sort of rough time frame on that or guidance therein?
Yes, we hope to have that into the Nova mine plan in next calendar year. The key consideration there is permitting.
Your next question is a follow-up from Mitch Ryan with Jefferies.
I just wanted to clarify, I think to pick up on the comment that you made that as Kwinana ramps up, you're looking to sell some of that off-spec product into the spot market platform. Did I hear you say the BMX platform as in PLS' platform? Have you had discussions with them about using that platform?
There's been discussions. We haven't locked in what platform we will use, but that would be a highly suitable platform to use.
Your next question is a follow-up from Daniel Morgan with Barrenjoey.
Just a follow-up on Silver Knight. Just going through the reserve statement, it looks like you have a right to mine a certain volume of material at Silver Knight. Can you just outline what this right is and what happens if you were to encounter extensions at depth? What are your rights to any of those extensions?
Yes. It's Matt here again. It's not a volume constraint, it's a material type constraint. So what we have said is any material that can be processed through Nova, i.e., transitional sulfide, will come in -- is right from our [indiscernible]. What we don't have the right to is what we believe to be uneconomic sulfide material. So that gives us the option to continue to extend that resource at depth as part of the drill outs.
Yes. It just looks like there might be a depth limit on the box that you're allowed to exploit based on the resource reserve statement at that?
Allowed at certain depth and outside the box is the joint venture so any additional sulfide outside that box would be part of the joint venture with Creasy.
And what are your rights to that material within that joint venture?
So we would have a 65% interest in Nova and we will be the operator of any new discovery outside that box.
That's all the time we have for our question-and-answer session today. I'll now hand back the conference to Mr. Bradford for closing remarks.
Hi, everyone. Once again we appreciate your participation through the presentation. I know there was a lot of materials to get through and I appreciate the insightful Q&A that we've had and wish everyone a good day. Stay safe and talk to you next quarter.
That does conclude our conference for today. Thank you for participating. You may now disconnect.